Under ESR regulations, all UAE bodies (including offshore companies, and branches of local and foreign companies) that are engaged in earning revenue from any of the Relevant Activities are required to maintain economic substance in the UAE. The central purpose of ESR is to encourage transparency in the UAE business market by ensuring that companies are tax compliant and are engaged in relevant business practices.
Relevant Activities under ESR
UAE business entities that engage in one or more of the following activities and generate relevant income should comply with ESR:
- Intellectual Property (IP) Business
- Shipping
- Holding Companies
- Investment Fund Management
- Lease-finance
- Headquarters
- Distribution and Service Centers
- Banking Businesses
The respective entities must file a notification within six months from the end of the financial year (FY). In the process of filing, entities are required to disclose the relevant activities conducted, the amount of income earned from these activities and if this income was taxable in regions outside of the UAE.
Economic Substance Tests
UAE entities that have earned income from any Relevant Activity must demonstrate adequate substance in the UAE relating to the pertinent activity by meeting the Economic Substance Test.
- Core Income Generating Activity (CIGA) Test
The criteria for the CIGA Test vary depending on the relevant activity. For example, in the banking business, a CIGA may constitute the raising of funds, providing credit services to customers, providing loans or taking risks. For the shipping sector, CIGAs will be measured differently; they may include managing ship crews, organizing trips, and tracking shipping. Entities will thus need to conform to CIGA requirements as per the respective practice.
- The Adequacy Test
To pass this test, business entities will be required to have recruited an adequate number of well-qualified employees in the UAE. In addition, they must also have adequate expenditure in the jurisdiction, and they must have a satisfactory physical presence in the country. Whereas, the applicability of the ‘Adequacy’ check varies on a case-to-case basis.
For functions of tracking the adherence of the UAE entities with the regulations, an annual report will want to be submitted to the Regulatory Authority inside 12 months after the stop of the fiscal yr. The annual record includes records that confirms compliance with the Economic Substance Test, such as the character of relevant interest, region of the place of work and range of full-time people.
The Directed and Managed Test
Business entities are required to be controlled within the UAE with respect to the relevant activity. For instance, regular board meetings, quorum of directors physically present, and minutes of all board meetings; these activities must be managed within the jurisdiction.
Penalties Action Against Non-Compliant Entities
Entities that fail to file a notification might also incur a penalty of AED 20,000, at the same time as entities that fail to record suitable reviews might also incur a penalty of up to AED 50,000.
Whereas, licensees that fail to offer complete, concise information may also incur a penalty of AED 50,000.
Entities that fail to meet the requirements of the ESR test will be charged AED 50,000 for the first year, along with instructions to coordinate with concerned foreign authorities. If the firm repeats this violation the following year, they will be charged up to AED 400,000, and this repetition of offence may lead to cancellation or non-renewal of the trade license.
Seek the expert services of top ESR Consultants in UAE
Economic Substance Regulations encourage transparency in the UAE business market by ensuring that companies are tax compliant and are engaged in relevant business practices. Therefore, to effectively ensure compliance with ESR, it is advisable for Licensees to seek the expert services of trusted ESR Consultants in UAE. Thus, contact us today and we shall be glad to assist you.